How QuickBooks can lower your tax bill!
For most of my “corporate life”, I was a Merger & Acquisition tax accountant: I would be travelling to newly acquired entities and reviewing and troubleshooting their accounting software. As a result I have worked on a wide variety of financial reporting systems: European, American, small businesses, large corporation. No matter how different the systems were they all had one common characteristic: the output is only as good as the input, meaning the more accurate the information recorded in the system, the more meaningful the reports produced.
QuickBooks is the same: if the data is correctly recorded, the financial statements and therefore your business tax return will be more accurate. When I perform the yearly close of the business books for my clients, I focus on key accounts that can potentially impact their tax bill.
1. Inventory & Supplies : Deduct Cost of Goods sold
As a general rule, inventory is merchandise that is held for sale to customers. Purchased or manufactured goods are kept in the balance sheet account “inventory” until the product is sold. When the sale occurs, the cost of merchandise is re-classed to the account “Cost of goods sold” and deducted from business profits. For example if you are a restaurant and buy bottles of wine that you store in your cellar, these bottles are recorded in inventory until sold to a patron. Consumables are items used as part of the service your provide your clients. They are recorded in the “supplies” account and are deducted immediately. For example, pens, paper, toner, ink are recorded in the supplies account.
2. Capital improvement or repairs: Deduct immediately up to $2500
As a general rule, the cost of capital improvement (such as the purchase of equipment) is recorded on the balance sheet in the “Fixed asset” account and the cost of maintenance is recorded in the “repairs” account. Capital improvement is deducted partially each year through “depreciation”, repairs other hand benefit from an immediate tax deduction. The challenge has always been to determine whether expenditure was to be recorded in fixed asset or in repairs. The IRS has issued a regulation to help taxpayers: in 2016 if the amount of your expenditure is $2500 or less, you can deduct it in repairs without any further research (De minimis safe harbor election). For example, if you purchase a new computer for $2,400 to keep your business books, you deduct the full cost of the new computer.
To read more on the IRS regulation: https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations
3. Business Start-Up Costs: deduct out of pocket expenses
Start-up costs are amounts you pay to set up your business and include cost such as survey of potential markets & products, advertisements for opening of the business, salaries and wages for employees who are being trained and their instructors, travels for securing prospective distributors, suppliers, or customers, salaries and fees for executives and consultants. As these costs are usually incurred before you start the business and before the business bank account is set up, you end up paying these expenditures with your personal funds. As they are qualifying business deductions, it is important that you record them in QuickBooks. This is done through the QuickBooks Journal Entry module.
To record a QuickBooks journal entry: http://quickbooks.intuit.com/r/accounting-money/accounting-101-adjusting-journal-entries/
4. Turn bad debt into a business deduction
If you are on an accrual basis method of accounting, you record your customer revenue through invoices and the revenue is taxed whether the customer payment has been received or not. In that case, any uncollectible debt will give you a tax deduction. A debt becomes worthless when there is no longer any chance the amount owed will be paid. To demonstrate worthlessness, you must show that you have taken reasonable steps to collect the debt but were unable to do so. It isn’t necessary to go to court. Bankruptcy of your debtor is generally a good evidence of the worthlessness.
To record a bad debt in QuickBooks: https://quickbooks.intuit.com/write-off-bad-debt/
The IRS has started requesting QuickBooks files!
QuickBooks should be an integral part of your business tax preparation work. The IRS has started requested QuickBooks files when performing audits , so it is more important than ever that your data is accurately recorded. For the rest of my tips on reducing your tax bill or a personalized QuickBooks consultation, contact me at Karine Bauer, EA Kbauer Financials LLC. As always, the views contained in this article are not tax or legal advice and are not a substitute for consulting with a tax professional.
Published on February 18th, 2017